Ethiopia has become one of the economic rising stars of the past two decades on the continent. It is undeniable that Ethiopia has done enormous progress in terms of infrastructure and industrialization since the early 2000s. But the Ethiopian economy remains fragile as a developing economy, and any serious political and socioeconomic issue could at any time relegate Ethiopia to a backward country like it was in the 80s and 90s.
After a decade of dynamic growth during the 2010s, Africa’s second most populous country has suffered multiple shocks, including the pandemic of COVID-19, a record drought, a two-year war in its northernmost region of Tigray, and the global impact of the War in Ukraine.
Inflation Rate in Ethiopia
Source: Central Statistical Agency of Ethiopia
Ethiopia is currently facing a high rate of inflation. As of today, the inflation rate in Ethiopia is about 33%. This is very high compared to the normal rate, which is below double-digit numbers. This persisting high inflation has increased the poverty level of the country. Between 2017 and 2022, the level of poverty in Ethiopia more than doubled. There are a few reasons for these alarming statistics.
First, the money supply in Ethiopia increased dramatically. This is one of the primary factors that drive inflation to high levels. A high money supply leads to more money chasing the amount of goods and services. The Ethiopian government printed more money and expanded credit excessively. This led to inflationary pressures.
Second, Ethiopia encountered structural issues. Ethiopia has faced structural challenges such as limited infrastructure, low agricultural productivity, and inadequate transportation systems. These factors can hinder the efficient distribution of goods and services, leading to supply-side constraints and upward pressure on prices.
Third, excessive deficits are another issue. The Ethiopian government's spending exceeds revenue, which can contribute to inflation. When a government relies heavily on borrowing or monetizing its debt (printing money to finance deficits), it can increase the money supply and inflationary pressures. This is what happened to the Ethiopian government for the last two years.
Fourth, Ethiopia has experienced periods of drought and crop failures, affecting agricultural output and food production. Insufficient food supply can drive up food prices, which can have a significant impact on overall inflation levels, especially in a country where a large portion of the population relies on agriculture for their livelihoods.
Fifth, the Ethiopian government introduced a series of price control to tackle the rising cost of certain products. But these price regulations exacerbated the issue rather than containing it. Indeed, it is important to understand that prices are signals that enable the efficient allocation of resources. Price controls distort those signals, then leading to the inefficient allocation of goods and services. As a result, this resulted in much more inflation than expected.
Ethiopia can always bounce back to its dynamic-growth level again. But for that, appropriate supply-side policies need to be implemented to enhance growth and stability. If the Ethiopian government continues to try to control market mechanisms, it might hurt the very thing that it tries to improve: the economy.